During alcoholic liver disease, almost all heavy drinkers develop fatty liver, which is marked by the aberrant and significant accumulation of intrahepatocellular triglycerides in the form of lipid droplets (LDs). Recent work from our laboratory has examined how ethanol exposure contributes to fat accumulation in the liver due to altered dynamic properties of LDs. Specifically, we hypothesize that ethanol exposure contributes to hepatic steatosis by altering LD metabolism via attenuation of both the lipolytic and lipophagic machineries. Lipophagy is one form of selective autophagy that requires many cytoskeletal, membrane, and autophagic factors, making this process susceptible to disruption by reactive metabolites derived from ethanol exposure. Our recent data in both animal and cell culture show that there is an intimate association between LDs and autophagosomes/lysosomes in the hepatocyte during lipophagy and that this autophagic interaction is reduced by ethanol exposure. We have also shown how LD dynamics in hepatocytes are regulated by several GTPases (dynamins and Rabs in particular) that can act as molecular switches to regulate membrane traffic; disruption of these GTPases could dramatically increase accumulation of LDs in the liver cell. In particular, we have examined the small regulatory GTPase Rab7, which is a key player to the targeting, recruitment, and engulfment of LDs by the autophagosome, allowing for subsequent lipolysis. We have shown in hepatocytes isolated from chronic alcohol-fed rats that alcohol administration inhibits enzymatic activity of Rab7, leading to reduced interactions, attenuated lipophagy and cellular steatosis. This Rab7-mediated regulation of hepatocyte lipophagy may involve either full engulfment of the LD by the autophagosome or a more transient interaction. Future work in this area will uncover new cellular mechanisms and processes we believe to be essential for the sequential action of lipolysis and lipophagy and how both these processes are disrupted by ethanol administration.